Best & Worst ETFs & Mutual Funds: Consumer Staples Sector

The Consumer Staples sector ranks first out of the ten sectors as detailed in mySector Rankings for ETFs and mutual funds. It gets my Attractive rating, which is based on aggregation of ratings of nine ETFs and eight mutual funds in the Consumer Staples sector as of January 23rd, 2013. Prior reports on the best & worst ETFs and mutual funds in every sector and style arehere.

Figures 1 and 2 rank all eight ETFs and all six mutual funds in the sector that meet our liquidity standards. Not all Consumer Staples sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 22 to 120), which creates drastically different investment implications and ratings. The best ETFs and mutual funds allocate more value to Attractive-or-better-rated stocks than the worst ETFs and mutual funds, which allocate too much value to Neutral-or-worse-rated stocks.

Figure 3 shows that 72 out of the 214 stocks (over 68% of the total net assets) held by Consumer Staples ETFs and mutual funds get an Attractive-or-better rating. Upon further inspection, we see that investors are putting money in the best Consumer Staples ETFs as 92% of total net assets are in Attractive or Very Attractive-rated ETFs. On the other hand, investors are not putting their money in the best Consumer Staples mutual funds as less than 26% of total net assets are in Attractive-or-better rated mutual funds. More ETFs (five out of nine) earn an Attractive-or-better rating than mutual funds (four out of eight) in this sector. That comparison suggests Consumer Staples portfolio managers are not deserving of their fees.

As noted above, investors need to tread carefully when considering Consumer Staples ETFs and mutual funds, as the overall Attractive sector rating does not mean all ETFs and mutual funds in this sector earn Attractive ratings.

Philip Morris International, Inc. (PM) is one of my favorite stocks held by Consumer Staples ETFs and mutual funds and earns my Very Attractive rating. It has a top quintileROICof 36% and risingeconomic earnings.

The current share price of ~$88.84 implies that the market expects a permanent, albeit slight, decline in PM’s profitability over the next year. Revenue growth of 1.2% and an economic earnings margin (ROIC-WACC) of 29% over the next year, both of which are inferior to last year’s performance, would correspond to a share price of just over $111, which would result in a nice gain for investors.

TreeHouse Foods, Inc. (THS) is one of my least favorite stocks held by Consumer Staples ETFs and mutual funds and earns my Very Dangerous rating. THS has a consistently pooreconomic earningsmargin (-2.1% over the past five years) but has seen its share price more than double over that same time. It appears THS investors must be focused on the company’s revenue growth, which, at 15.4% compounded annually over the last five years, is impressive. However, THS can increase its revenue all it wants, but without positiveeconomic earningsthere is no shareholder value creation and no economic justification for its current valuation.

124 stocks of the 3000+ I cover are classified as Consumer Staples stocks, but due to style drift, Consumer Staples ETFs and mutual funds hold 214 stocks.

Figures 4 and 5 show the rating landscape of all Consumer Staples ETFs and mutual funds.